Pointing to budget constraints and headcount reductions on the buy side, trading platforms catering specifically to single asset derivatives may become obsolete over time, says Aite’s report.

The 67-page report, published in September, examines front-office workflow by looking at EMSs with risk analytics and e-trading platform functionalities in listed futures and options from multi-asset EMS vendors that cater to the buy side.

Economic & Regulatory Forces

Howard Tai

Along with the migration of electronic trading to other asset classes, there are now fewer traders on the desk, and the trend is to make them accountable for executions across multiple asset classes, instruments and regions of the world, notes the report.

With limited IT and operational support for multiple systems and “cut backs” on single-asset trading platforms, Aite maintains that institutional firms will want to replace single asset platforms with multi-asset and multi-instrument OMS and EMS platforms.

“We are seeing a trend away from highly specialized traders toward more generalist traders who are responsible for more asset classes, especially FX, equities, options and futures,” said Jamie Benincasa, senior vice president at FlexTrade Systems.

As some buy-side desks have slimmed down their ranks, traders are handling combinations of multiple asset classes. An equity trader may need to liquidate an international position, put on an FX trade to hedge the exposure and use excess cash to buy futures, illustrates Benincasa.

Jamie Benincasa

However, there will be specialized roles within firms that require tools that focus specifically in the derivatives pricing and trading area, he said. For the vast majority of accounts that are using a common platform for ease of use, a less specialized, multi-asset approach suits their needs well, said Benincasa. But, there are sophisticated options traders who will never move away from a specialized options platform, said Benincasa.

“They still derive value from that package,” he said, referring to FlexTrade’s Derivix specialized, options trading package utilized by hedge funds, broker dealers, market makers and proprietary trading desks. “From a best-of-breed perspective, we still have hedge funds that are completely focused on derivatives and options-based strategies that require a software package that can truly meet their needs,” he said.

Here are some of the key market trends that are shaping the future of the global EMS market:

Institutional buy-side trading desks have expanded rapidly across the past 15 years by hiring talent fleeing the sell side. These trading specialists requested their preferred tools on the buy-side trading desk. As a result, the number of asset-class-specific trading platforms has multiplied on buy-side desks.

In today’s cost conscious environment, firms are strategically consolidating the number of EMSs to two or three at most. Firms are pushing their preferred EMS vendors to include tools and workflows that minimize screen real estate and reduce cost and complexity.

Trading-desk staff is now being trained to trade multiple asset classes, “ready or not.” A generational shift is underway toward a multi-asset trader who needs to manage order flow on one consolidated blotter.

A multi-asset EMS allows the desk to consolidate systems as well as headcount. If the EMS offers everything the trading desk needs, the barriers to adopt it are much lower, states the report.

Though trading has become less specialized, it means that traders need to be more sophisticated in terms of understanding the macro-side of investing, according to Benincasa. If a trader wants to make a bet on oil, it could entail buying a stock, futures and options. “In order to outperform your peers, you use a mix of asset types to get the most exposure with the ability to monitor risk,” he said.

Why EMSs are important?

EMSs typically excel at aggregating and employing real-time information from disparate market data sources, so that traders can execute on more timely trading strategies.

With traditionally voice-driven markets moving toward electronic trading, demand for fully electronic multi-asset trading support across the trade life cycle is increasing. For example, fixed income and derivatives trading is more real time and data-driven, supported by a host of new electronic venues and pricing platforms.

Regulations Focusing on Best Execution

Global regulators are stepping up the buy-side’s fiduciary responsibility to its end investors. With MiFID II, the buy side will need to obtain the best possible investment results and be able to demonstrate it on every order across multiple asset cases. The only way to achieve this will be through electronic execution, according to Tai. When MiFID II rolls on in early 2018, compliance officers will be looking to see if the trading desk can prove best execution. According to Aite Group, multi-asset EMS’s that address these needs are the ones that will gain traction.

These are some other key trends:

Usage of transaction cost analysis (TCA) is expanding beyond post-trade reports into pre-trade analytics. Some EMS vendors are offering automatic feedback loops to modify open orders based on real-time and historical TCA.

Regulatory requirements for TCA across multiple asset classes and instrument types will become a high priority in the post-MiFID II world where the need to prove best execution becomes a top priority.

What Are Buy-Side Traders Requesting from their EMS providers?

According to Aite, EMSs’ R&D is focused on helping their clients with workflow management, which will differ by client segment and the capabilities of each EMS.

Under the current economic reality, most EMS vendors have delivered many significant workflow enhancements. According to Tai, most EMS R&D is focused on helping clients with workflow management.

Improvements can range from reducing clicks to streamlining the number of repetitive processes to deploying automated order routing as the centerpiece of the trader’s execution strategy.

Traders are also demanding that EMSs incorporate new data sources into their trading workflow, including predictive analysis, social media, artificial intelligence and unstructured data sets. All of this market data could be pumped through the trade blotter. The challenge for EMSs is how to incorporate this fire hose of data without disrupting trading workflow, which is a puzzle that all vendors are working on.